New crowdfunding regulations bring opportunities for startups

Kickstarter helped put the word crowdfunding on the map when it launched in 2009.

But Kickstarter, and others like it, have their limits. While they offer rewards, they don’t enable projects or startups to offer a stake in the company. Governments around the world have recognized that need, and began instituting regulations to enable just that, including the U.S. JOBS Act that was announced in 2012.

Here's how news site PandoDaily explained the U.S. act:

While the U.S. act and it’s accompanying equity crowdfunding policies have been held up, it did push Canada into action. On March 20, things started moving in a big way when the Ontario Securities Commission (OSC) proposed a set of crowdfunding regulations that would allow companies to raise up to $1.5-million in a 12-month period. In essence, startups will post their projects to an online portal in a bid to earn investment.

Planned in cohesion with Quebec, Manitoba, New Brunswick, Nova Scotia, and Saskatchewan (which has a different funding cap), advocates say the proposed changes are a game-changer for crowdfunding in Canada.

The new regulations are aimed at helping companies somewhere in between the smaller Kickstarter-type funds in the tens of thousands of dollars, and larger, multi-million investments from angel investors or venture capitalists.

“There’s a funding gap,” Asano says, and that’s the need this regulation is trying to fill.

Startups

The proposed regulations would allow companies to raise the $1.5-million maximum, with individual investors able to contribute up to $2,500 for a single business. In exchange for their contributions, investors would receive shares in the company, which in turn gives them voting rights. How much influence, and what they’ll be entitled to vote on, has yet to be determined.

The paperwork, time and costs that come with the current model of investor funding for small businesses are areas that would see vast improvement with the crowdfunding regulations in place.

“As a startup I'm pretty excited about it,” says Suzan Bsat, the co-founder of Figure of Eight, which focuses on software for medical billing data.

While she’s eager for increased access to outside investors, Bsat does point to one area of concern: “We have to be cautious about who we're giving part of our company to.”

“It’s not just about money, it’s about the relationship too,” says Thomas Sychterz, co-founder of Wipebook, which raised $424,000 on Kickstarter for its whiteboard notebook product.

Regulatory framework

The OSC proposals are two-fold: a prospectus exemption and portal requirements. The prospectus exemption essentially allows companies to avoid having to file a prospectus - a lengthy and expensive document to produce that a company issues when going public on the stock market. That’s because these companies fall somewhere in between private and public -- there’s an obligation to the crowdfunders, and therefore a level of transparency is required.

At the same time, these startups aren’t putting themselves on the open market, and don’t need to follow as stringent regulations as companies trading on the Toronto Stock Exchange.